Bush says no recession, consumer spending says otherwise

Two articles came out in the past couple of dates that encapsulate the sum of news regarding economics which everyone needs to be familiar with. First up, Bush denies the US is heading into a recession:

"I don't think we're headed to a recession, but no question we're in a slowdown," Bush said.

The Federal Reserve is not forecasting a recession. It does predict slow growth for this year as well as higher unemployment.

"I realize that my testimony wasn't the most cheerful thing you'll hear today ... but I do very much believe that the U.S. economy will return to a strong growth path with price stability," Bernanke told the Senate Banking, Housing and Urban Affairs Committee. It was his second day in a row on Capitol Hill discussing the economy.

But this contrasts with the numbers coming out on the economy:

A government report Thursday showed the fragile state of the economy. The economy nearly stalled over the final three months of 2007. It grew at a pace of just 0.6 percent, a big loss of momentum compared with the brisk growth rate of 4.9 percent from July through September.

The National Association for Business Economics expects economic growth from January through March to slow to a meager 0.4 percent pace. Some analysts believe the performance could be even worse and actually shrink during this period. Under one rough rule, the economy would have to contract for six months in a row for the country to be viewed as in a recession.

Why do Bernanke and Bush have such a rosy view of the economy?

Bernanke and the Bush administration are hopeful the economy will turn stronger in the second half of this year, helped by the Fed's rate reductions and the recently enacted rebates for people and tax breaks for businesses.

They're "hopeful". It's one thing to be hopeful like Obama. I mean, he's not the President (yet). It's another thing to be hopeful when you are President. But I guess if you don't have any ideas for how to fix the problem, you might as well deny that it exists!

In related news:

The Commerce Department reported that spending posted a 0.4 percent rise in January, better than economists had been expecting. However, all of that gain came from a surge in inflation during the month.

Taking away the effect of rising prices, spending showed no gain in January, the second straight month that real spending failed to advance.

As we all know, the best indicator of the health of the economy is consumer spending. When it goes south, the economy slows down in accord. I suppose it's possible that it will turn around without significant aid from the federal government, but I don't think so. Read my previous posts if you need to catch up on what's going on.

Economy Beginning to Weaken

From the NY Times:

The job market took a serious and unexpected turn for the worse in August, raising fears that the risks of a recession are greater than many economists had believed.

The economy shed 4,000 jobs between July and August, with industries that are connected to the housing market — like construction and manufacturing — making the deepest cuts, the Labor Department reported today. It was the first employment decline since 2003, when the job market was still struggling to emerge from a long slump in the wake of the 2001 recession.

“If the economy is not headed toward recession, it is very close to one,” said Mark Zandi, chief economist at Moody’s Economy.com.

This belies what Bernanke claimed a few months ago about the future of the economy.

(AP) Federal Reserve Chairman Ben Bernanke told Congress on Wednesday he doesn't believe the economy will slip into a recession and rejected the notion raised by his predecessor, Alan Greenspan, that the economic expansion, which started in late 2001, could be running out of steam.

And:

On another topic, Bernanke said the growing troubles in the market for risky mortgages thus far doesn't appear to be spreading to the overall economy. "At this juncture ... the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained," he said.

He hedged his bets, but still said that he expected any problems would only slow down the economy, and didn't believe a recession was in the future.

I suggest reading the rest of the NY Times article so you can understand the various forces that are affecting the economy at the moment. To paraphrase, job creation is down and while official unemployment is flat, the percentage of adults with jobs is down. It's all very, worrying news.

WHAT RECOVERY?

Credit goes to Adam for sending me the article. I thought this would tie in nicely with my previous post about taxes.

We've all heard people from both sides of the political spectrum talking about the economy, and you get two completely different pictures. On the one hand, the Republicans are talking about the growth of the economy and the stock market. Bush also tells us he's created millions of new jobs. "The truth," said Bush, "is that since August 2003, America has added almost five million new jobs."

On the other hand, Democrats talk about a sluggish economy, lack of jobs and the low pay of many existing jobs. So there's some discrepancy there. Most people evidently have not seen the economy helping them any and have a more pessimistic outlook than Bush would like.

The trouble for Republicans is that the American people believe they're still in
a recession. A new poll by the American Research Group finds that a whopping 58
percent of voters disapprove of Bush's handling of the economy while only 36
percent approve. (The figures are virtually identical to those for his overall
job approval rating, which lists 57 percent disapproval and 37 percent
approval.)

Reflecting a polarized nation in which Democrats and
Republicans work, live and worship side by side while apparently living in
separate realities, most liberals disapprove and most conservatives approve of
Bush's economic stewardship. But the GOP has good cause for concern as this
fall's midterm elections draw closer: the self-identified Independents who have
determined the outcome of recent races disapprove, 66 to 28. Even more
worrisome, most voters--by a margin of 47 to 36--think the economy is getting
worse. Americans haven't been as pessimistic about the American Dream in years.

While perception is not always reality, if more than half the people say they saw something, then you know they saw something (unless it's at a magic show, but most people aren't falling for Bush's tricks anymore). Rall goes on to explain why people might think like this.

"The truth," said Bush, "is that since August 2003, America has added almost five million new jobs."

Sounds great, but it depends on what your definition of "added" is. According to the Economic Policy Institute, the U.S. economy must generate 150,000 jobs every month in order for the unemployment rate to stay the same. Because the total number of workers rises with population growth, a president who creates fewer than 1.8 million new jobs each year presides over rising unemployment.

Just to stay even, then, Bush would have had to create 4.65 million jobs between August 2003 and the present. By his own admission, he only has 350,000 net new jobs to show for a workforce of 143.6 million people--a net increase of less than one quarter of one percent. No wonder Bush isn't feeling much love.

Moreover, some 1.9 million jobs--net jobs--vanished before August 2003, during the first two and a half years of Bush's first term. That wasn't all his fault. He came into power at the start of the dot-com bust. Nevertheless, Bush's tax cuts didn't help. Those lost jobs never came back. The people who lost them are still unemployed, underemployed or have been statistically transformed into "unpersons," the "discouraged job seekers" no one bothers to count.

So, really simply, Bush's economy has created just enough jobs to keep unemployment the same and produced a surplus of 350,000 since August 2003. But before that, 1.9 million jobs disappeared. So he's only reduced that pre-existing population of unemployed from 1.9 to 1.55 million.

I don't know how many people aren't being counted as unemployed because they're no longer seeking work, but I do know that a significant portion of working Americans are under-employed and that the numbers of unemployed may not continue to rise as a percentile, but as an actual number keep right on going up.

Rall also argues against the idea that the macro-economy is really doing that well.

Can the economy boom without benefiting individuals? Economists often ask themselves that question, but that's not what most Americans believe is going on. When they look beyond their personal financial situations, they see a dismal macroeconomic reality reflected in 401(k)s that have yet to recover from their post-dot-com losses. The Bush Administration has added $2.7 trillion to our national debt. Not only do its expensive wars in Afghanistan and Iraq have no end in sight, now they're talking about nuking Iran. The U.S., they know, is broke and getting broker.

Unemployment rising

That title reminds of the very bad horror movie, "Deep Rising". Like that movie, this story sucks, but unlike the movie you can't just get up and leave. As Xanthippas posted recently (like, this morning), the Treasury has decided to focus more on the consumer side of the economy. I'm not an expert, but I'm just really skeptical that this kind of plan will work. I know there are different theories of what part of the economy is the most important to keep it growing. Well, the American economy's growth was definitely pushed by consumer spending, more than just about any European or Asian country's. The reason for that, of course, was the ease of availability of credit. But that credit is exactly why we're in the situation we're in now. We know that in real terms, American wages have not been growing. People just don't make as much as they used to compared to the cost of living. Credit came in to help fill the gap between how people could live and how they wanted to live. Unfortunately, that's had a ruinous effect on the economy. I'm saying that perhaps the answer is not to try to lubricate the economy with credit, but rather that we find a way to free people's income up from debt to begin with. This will take a bit of work, sure, but in reality people just need to be paid enough to live and buy plenty of goods with cash. We don't need auto dealers selling cars again to people who can't really afford them.

Besides which, consumer optimism is going down. How many people are going to walk into the car dealership right now and try to get a new car? It's not just that the money's not there, it's that even people who have money are thinking twice about spending it on something they may not really need. Check out the latest jobless numbers:

The number of newly laid-off individuals seeking unemployment benefits has jumped to a level not seen since just after the Sept. 11, 2001, terrorist attacks, as companies cut more jobs in the face of a slowing economy.

The Labor Department on Thursday reported that jobless claims last week increased by 32,000 to a seasonally adjusted 516,000. That nearly matched the 517,000 claims reported seven years ago, and is only the second time since 1992 that claims have topped 500,000.

The total also was much higher than analysts expected. Wall Street economists surveyed by Thomson Reuters expected claims to increase only slightly to 484,000. Initial claims from two weeks ago were revised upward Thursday by 3,000 to 484,000.

The increase puts jobless claims at levels similar to the recession of the early 1990s. The four-week average of claims, which smooths out fluctuations, increased to 491,000, the highest in more than 17 years.The number of newly laid-off individuals seeking unemployment benefits has jumped to a level not seen since just after the Sept. 11, 2001, terrorist attacks, as companies cut more jobs in the face of a slowing economy.

The Labor Department on Thursday reported that jobless claims last week increased by 32,000 to a seasonally adjusted 516,000. That nearly matched the 517,000 claims reported seven years ago, and is only the second time since 1992 that claims have topped 500,000.

The total also was much higher than analysts expected. Wall Street economists surveyed by Thomson Reuters expected claims to increase only slightly to 484,000. Initial claims from two weeks ago were revised upward Thursday by 3,000 to 484,000.

The increase puts jobless claims at levels similar to the recession of the early 1990s. The four-week average of claims, which smooths out fluctuations, increased to 491,000, the highest in more than 17 years.The number of newly laid-off individuals seeking unemployment benefits has jumped to a level not seen since just after the Sept. 11, 2001, terrorist attacks, as companies cut more jobs in the face of a slowing economy.

The Labor Department on Thursday reported that jobless claims last week increased by 32,000 to a seasonally adjusted 516,000. That nearly matched the 517,000 claims reported seven years ago, and is only the second time since 1992 that claims have topped 500,000.

The total also was much higher than analysts expected. Wall Street economists surveyed by Thomson Reuters expected claims to increase only slightly to 484,000. Initial claims from two weeks ago were revised upward Thursday by 3,000 to 484,000.

The increase puts jobless claims at levels similar to the recession of the early 1990s. The four-week average of claims, which smooths out fluctuations, increased to 491,000, the highest in more than 17 years.The number of newly laid-off individuals seeking unemployment benefits has jumped to a level not seen since just after the Sept. 11, 2001, terrorist attacks, as companies cut more jobs in the face of a slowing economy.

The idea behind the new plan is that if people start buying stuff, the economy will at least halt the decline in actual growth. But I say let's not be short-sighted here. It was not the freezing of the credit markets that popped the bubble that started all this. It was the fact that at some point, a critical mass of people erupted who couldn't live up to all the debt they'd taken on. And now, what, we want to start lending mortgages again and selling cars? To whom, may I ask? I've kept my job but I'm certainly no better off now than I was 3 months ago. And my next pay raise ain't gonna bring me up to that magical next socio-economic level. In short, at best, we're right where we were when the bubble popped: people are still over-stretched and cash-short. Credit can't help that. Not for must of us, anyway. Millions of people have been saying, "Hey, if we can bail out the giant companies who were so irresponsible, why not bail me out?" And why not indeed? If we're going to waste that kind of money, just cut me a $2,000 check.

Or better yet, use it to begin an agency that helps people renegotiate their debts, with the power to mandate changes in principal to lenders and set interest rates, and also minimum payments. If you want people spending more on consumer goods, well, they need to have cold, hard cash. Cut their debt payments in half, make them unable to take on so much as a $100 store card at Kohl's, and let them go. Deduct their debt payments straight from their pay. Make sure they're getting groceries and other necessaries, and that they have enough cash to waste some on consumer goods. Also, create a federal job force (yes, just like the WPA) to put some actual cash in people's pockets. It may sound like an enormous expenditure, but even many conservative economists say it's ok to run up a deficit to get the economy going in a recession (or depression). As a side note, Congress shut down the WPA in 1943 because there was no need for it. With the onset of the war economy, employment ran at nearly 100%. So, why, in all these years since, has no one thought to reinstate a federal work program to keep employment high? It would exert a positive pressure on wages, as people in low-paying jobs could always defect to the federal workforce. Just my thoughts.

In a related story, Business Week tells us that in this recession, you are more likely to lose your job than take a pay cut. Take that as good or bad, whatever you will.

Pay hikes may fall below current expectations, and while employers are planning to raise pay, they are simultaneously cutting jobs. The jobless rate hit 6.5% in October, and many economists think it could reach 8% by late 2009. Employers are also looking for less conspicuous ways to save on benefits, such as reducing 401(k) matches or increasing deductibles and co-payments in health plans. A Watson Wyatt Worldwide survey in mid-October showed that 26% of employers were planning layoffs or other reductions in force in the coming 12 months, while 25% planned to raise employee contributions for health care. In contrast, only 4% were planning to cut salaries. "Firms are cutting workers instead of wages," says Ethan S. Harris, co-head of U.S. economics at Barclays Capital in New York.

By raising pay while cutting jobs, companies can "thin the herd" while giving remaining workers "the big corporate hug they need," says William C. Yoh, CEO and president of Yoh, a unit of Day & Zimmerman Group that supplies high-tech temps. Starbucks (SBUX) recently announced it was cutting jobs but isn't cutting pay or benefits. "We have to take care of our partners [i.e., employees] and keep them engaged," says spokeswoman Tara Darrow.

Uh, thanks, that's mighty gracious of you. Well, at least they're not saying they're going to start paying people in coffee.

Anyway, now you know more than you did. What say you?

Update: Krugman repeats that drastic times call for drastic measures.

Americans not too sure about the economy being so good

Despite President Bush and FOX News telling us how great the economy is, most Americans don't believe it for some strange reason:

George W. Bush's overall job approval rating has dropped to 25% as nearly seven in ten Americans say the national economy is getting worse according to the latest survey from the American Research Group. This matches the lowest approval rating for Bush recorded by the American Research Group.

Among all Americans, 25% approve of the way Bush is handling his job as president and 67% disapprove. When it comes to Bush's handling of the economy, 23% approve and 67% disapprove.

Among Americans registered to vote, 26% approve of the way Bush is handling his job as president and 67% disapprove. When it comes to the way Bush is handling the economy, 25% of registered voters approve of the way Bush is handling the economy and 67% disapprove.

Americans are split almost dead even on the question of recession:

Overall, 40% of Americans say they believe that the national economy is in a recession and 38% say they do not believe the economy is in a recession.

But more importantly, people are finding it harder and harder to live paycheck-to-paycheck in the Bush/Republican economy.

The calculus of living paycheck to paycheck in America is getting harder. What used to last four days might last half that long now. Pay the gas bill, but skip breakfast. Eat less for lunch so the kids can have a healthy dinner.

Across the nation, Americans are increasingly unable to stretch their dollars to the next payday as they juggle higher rent, food and energy bills. It’s starting to affect middle-income working families as well as the poor, and has reached the point of affecting day-to-day calculations of merchants like Wal-Mart Stores Inc., 7-Eleven Inc. and Family Dollar Stores Inc.

Food pantries, which distribute foodstuffs to the needy, are reporting severe shortages and reduced government funding at the very time that they are seeing a surge of new people seeking their help.

Compassionate conservatism has been implemented in response to the pantry issue.

Meanwhile, the income inequality gap continues to widen as the IRS confirms the rich are getting richer and the rest of us are being left behind.

Of course, at a recent Republican debate on economic issues, the presidential candidates all pretended that absolutely nothing is wrong. Can any of us (literally) afford four to eight more years of this crap?

Bad news for Republicans clinging to economic hopes

The economy has experienced sluggish growth in the 2nd quarter, putting to death the idea that the American economy is doing well despite the indicators that are plainly visible to all of us. As noted in my last post on economic issues, despite overall growth of the GDP, the benefits have not been filtering down to the individual level. And until now, conservatives have still been using the figures of robust economic growth to argue the position that the economy is actually doing well and people just don't want to give credit to this administration for that. Of course that viewpoint is baloney, but to further bury that idea, this quarter we have seen inflation rising at a dangerous rate as well as tepid growth of the GDP.

All totaled, the nation's gross domestic product, which measures the value of all goods and services produced, rose at a below-average 2.5 percent annual rate in the second quarter, a sharp drop from the rapid 5.6 percent pace of the first quarter, the Commerce Department said.

Meanwhile, consumer prices shot up at a heated 4.1 percent annual pace in the quarter, according to Commerce's inflation measure. That was more than double the rate in the previous quarter, and matched the rate of the third quarter of last year, when energy prices soared after Hurricanes Katrina and Rita.

Of course these numbers fluctuate all the time, so one bad report isn't necessarily cause for us to start jumping off buildings yet. Unfortunately, there is more bad news. Wages are not only not keeping up with inflation, they're falling far behind.

The inflation rate was much higher than the increase in workers' wages, salaries and benefits, according to the Labor Department's employment cost index, which was also released today. The ECI rose 0.9 percent in the last quarter, up from a 0.6 percent increase in the first quarter. That left the index 3 percent higher in June than the same month last year.

The obvious object of blame for this downturn is energy, namely gasoline prices. It's hurting the bottom line of many consumers. I've read quite a few pie-in-the-sky articles recently about how gas prices aren't actually hurting the economy, but it seems that it's finally taking an indisputable toll. A lot of that GDP is in the energy sector, where oil companies are still reporting enormous profits. For example, Chevron posted record profits:

The San Ramon-based company earned $4.35 billion, or $1.97 per share, for the three months ended in June. That represented an 18 percent increase from net income of $3.68 billion, or $1.76 per share, at the same time last year.

Exxon-Mobile is also doing fine:

Exxon Mobil Corp. said yesterday that its second-quarter earnings jumped 36 percent, to $10.36 billion, boosted by climbing oil prices and larger profits at its refineries.

Unfortunately, a lot of that money is coming out of consumers' bottom lines and those high gas prices are responsible for the inflation we've been experiencing.

Much of the inflation in the second quarter was due to rising energy prices, as oil shot above $70 a barrel and gasoline averaged close to $3 a gallon. And oil and gasoline prices have moved higher since June, suggesting price pressures remain strong.

The rest of the article details how the consumer market is weakening, basically because Americans' wages aren't growing enough to enable them to keep buying consumer goods at the previous rate because gas prices are eating them alive.

The economy cooled during the past three months primarily because consumer spending rose more slowly, at an annualized 2.5 percent rate, down from a 4.8 percent pace in the first quarter. That confirmed other recent reports of the softening housing market, falling automotive sales and weak results for many retailers, particularly those such as Wal-Mart that cater to the lower-income households hardest hit by high gasoline prices.

It's not a rosy picture. We need to take it seriously and the best thing we can do to divorce our economy from inflationary pressures is to make ourselves independent of energy from unstable sources. We need to get off gas powered cars at least enough to lower our oil use to only what we can get from domestic and friendly, stable producers. Switching over to ethanol may cost just as much at the pump, but that money would be flowing into the coffers of domestic American producers. It's not just that we'd be keeping that money in America, but that ethanol (among other energy industries) is produced a lot more locally and widespread than oil, natural gas or coal. That is money that would flow into local economies of the American landscape, something we badly need.

In addition to this, we need to counter the depression of wages by raising them to a "living wage" level. We should accomplish this through raising the minimum wage. Despite what some argue this would do to the economy, it is painfully obvious that the Wal-Mart model of lowering prices at the expense of wages is a monumental failure and disastrous on the local level. These suggestions will not fix everything that's wrong with our economy, but we have to start somewhere.

What's wrong with free trade? Everything!

"Free trade aint free!" - Nat-Wu

In this op-ed in the NY Times, economics professor Steven Landsburg attempts to explain to us why free trade is always good, even when it costs Americans their jobs.

All economists know that when American jobs are outsourced, Americans as a group are net winners. What we lose through lower wages is more than offset by what we gain through lower prices. In other words, the winners can more than afford to compensate the losers.

What, really? I don't think so. What he means by "Americans as a group are net winners" is that cheaper goods enable those Americans who don't lose their jobs or take wage hits to buy more crap. Sure, that's a tangible benefit to a lot of people. But it does cost Americans jobs and wages. Landsburg is aware of this of course, but he tells us that even those people should be grateful for globalization.

Even if you’ve just lost your job, there’s something fundamentally churlish about blaming the very phenomenon that’s elevated you above the subsistence level since the day you were born. If the world owes you compensation for enduring the downside of trade, what do you owe the world for enjoying the upside?

Global trade has existed as long as humans have lived in societies where people specialized in production. This is not necessarily a bad thing. It enabled people of one locale to gain access to commodities they could not produce. But no matter how large the scale, this is not the same as exporting part of your own economy. For example, before and during the rule of the Inca empire, the llama herders of the altiplano would trade llamas (a source of meat and hide) to the lowlanders for vegetables they couldn't grow. But this was an equal exchange of goods neither community could produce both of. The difference between this sort of "free" trade that has always existed and the free trade that Landsburg is advocating is that it didn't do any economic harm to either economy.

Let me back up a moment here though, and offer an insight into the thinking of economists like him who view globalization as 100% good. To them, the entire world is one business community. There are no separate national labor pools, the world is the labor pool. That's why to them any kind of protectionism smacks of "bullying" (he makes this comparison later on). Furthermore, these guys have no problem with unequal distribution of wealth. They generally subscribe to the idea that extreme wealth in the hands of the few is as good as prosperity in the hands of the many because when you total up all the assets of a nation, it equals the same thing.

To bring this back to my example of the Andean communities, there can be no stratification on such a scale. One man may be lucky and his herd grow larger than a neighbor's, but both are still producers in a nonzero-sum system; that is, one man's business doesn't rob from the other's. In a competitive economy where both men work for the same reward constrained by the same environmental factors, there can be no such inequality. This changes in a consumer-driven economy where wealth is already concentrated. If one man did own all the llamas, you can say it makes sense for him to employ the poorest men of the community so they can demand lower wages of him. But even in this case, these are men of the same community. It's not fair, but at least money stays in the local economy. What Landsburg is defending is the llama herder completely moving his operations out of the area and giving the jobs to foreigners who are poorer than dirt so he barely pays anything in wages. To him, as an economist, this makes sense because it increases profit (the sacred object of capitalism). In a sense, this is definitely thinking beyond borders, and even somewhat altruistic. There isn't any reason we should hold other men down and keep all the good jobs for ourselves. Or is there?

I didn't state this explicitly before, so here it is: this kind of global free trade that Landsburg lauds is nothing more than a scheme to pillage the lower classes of Americans and foreigners by the wealthy. Americans have their jobs ripped away from them and sent overseas for workers who make pennies on the dollar of the American worker. Americans see reduced prices for things they can barely afford with their depressed wages or government assistance (read Barbara Ehrenreich's Nickeled and Dimed for more on that). Sure it's great for the middle class (if they're not losing their jobs, that is), but it's hell on the poor. Those foreigners don't enjoy the benefits of reduced prices in their own countries either. They're getting paid in the same currency, and usually substantially less than we are. Guess who most of the profit goes to? Either the wealthy business owners of our country or the wealthy business owners of their country. That's the way it always is, you know.

Landsburg blithely makes the claim that this is good for us. Well, it sure is if you're a rich person. It's not so great if you're a working stiff.

Middle-aged men moving in with parents, wives taking two jobs, veteran workers taking overnight shifts at half their former pay, families moving West — these are signs of the turmoil and stresses emerging in the little towns and backwoods mobile homes of southeast Ohio, where dozens of factories and several coal mines have closed over the last decade, and small businesses are giving way to big-box retailers and fast-food outlets.

Here, where the northern swells of the Appalachians lap the southern fringe of the Rust Belt, thousands of people who long had tough but sustainable lives are being wrenched into the working poor.

I could forgive Landsburg for being thoughtless about how this system treats real people, but he did say "Even if you’ve just lost your job, there’s something fundamentally churlish about blaming the very phenomenon that’s elevated you above the subsistence level since the day you were born." What, it's churlish to be resentful that you got shafted by rich people so they could make even more money?

Now how about this other claim, that this process has "elevated you above the subsistence level since the day you were born"? Ridiculous. Plainly and utterly ridiculous. The best time in America's history for America's workers was when we were the ones producing the goods (after WWII up into the 60s); when our workers were getting paid (adjusted for inflation) the highest wages they've ever made. I hear it wasn't bad for the United State's Treasury either. The US had plenty of money to throw around because Americans were making money and paying taxes. America relied on other nations to supply us with things we couldn't make enough of in the first place, like feeding our voracious appetite for beef (we've always produced a lot of beef and still had to import more), but we produced our own cars, our own houses, our own food (even our own oil!) and a million other things. It's always better to produce what you can on your own, even if, from a corporate point of view it's a slimmer profit margin. Landsburg also ignores the real and tangible evidence of what globalization is doing to us: destroying our economy! People are losing jobs left and right as they're outsourced, low wage jobs are replacing the solid ones they had and there's a drain on government resources as we support more and more jobless people (who can't get a job no matter what they do). You know what I bet Landsburg's reaction would be? "Move to India." Yeah, brilliant. What's India going to do with 20 million Americans?

Again, to reinforce the point I've already made, this is a scam! What happens to those profits the corporations pocket from the difference in wages between American workers and foreigners? Well they go to the shareholders, most of whom are not your granny but rather people (or other corporations) who own millions of dollars worth of stock already. What's so great about that, Landsburg?

Now I've already refuted this point, but just to make it clear, here Landsburg tries to equate trade specialization in local economies with global free trade:

I doubt there’s a human being on earth who hasn’t benefited from the opportunity to trade freely with his neighbors. Imagine what your life would be like if you had to grow your own food, make your own clothes and rely on your grandmother’s home remedies for health care. Access to a trained physician might reduce the demand for grandma’s home remedies, but — especially at her age — she’s still got plenty of reason to be thankful for having a doctor.

If this is the best you can do, Landsburg, then you need to rethink your career. What he ignores, avoids, or just plain doesn't know, is that the effect on the local economy of specialization is that people are allowed to be more productive overall, increasing the level of wealth thoughout the local economy as a whole. That's a closed system. Sure, you can also make it into a global system by specializing in many items and trading those with your neighbors (per the examples I gave above). But that's the exact same function on a larger scale. There's no internal decrease of wealth and as a matter of fact there should be a large internal increase of wealth using this system. Yes, workers in one closed system can demand higher wages to make their products than workers in another closed system. But that doesn't result in any cost imbalance. For workers inside one system, if products that come out of another system are cheaper they can increase their own personal net wealth by having to spend less. But only if they're guaranteed the kind of wages they can demand inside their own closed system. Theoretically, if all internal economies were truly free and laborers could bargain inside any closed system with the capital owners, all laborers inside all closed systems could demand higher wages and get them.

Furthermore, a rather obvious law (which Henry Ford used to his own advantage) is that the more you pay people the more they can buy. It may also work to a certain extent in reverse, that is the cheaper the good the more they can buy, thus enabling you to lower wages, but the fact of the matter is that there are absolute fixed costs you cannot lower. You can't make milk cost 29c a gallon again. You can't make gas cost 35c a gallon again, and that makes a ton of difference! There is an absolute floor to wages, no matter what Landsburg (and Wal-Mart execs) wants to think. That's why the US government designates a federal poverty level.

If you take two closed economies and open them up so that they can trade components, obviously the business owner who pays his workers more will seek to shift his business to the economy where they get paid less. This may create more jobs for those people, theoretically raising their wages (but not in practice, at least not to the extent economists claim should happen). What happens is you've impoverished one economy without enriching the other. There is no good here. There is no upside for the worker. All that extra money remains in the hands of the owner. The factor that keeps this going is that for a while most of the first economy will remain intact, thus providing the illusion that this is a winning strategy. Until the economy crashes, that is.

I'm not going to bother demolishing all his examples as it shouldn't be necessary for me to spell out why they're all wrong after I've given you this much ammunition for yourself to use on such arguments. I leave you with this: the number one factor of the current recession is the shrinkage of American wages which has been occurring since the 70s. Landsburg's global free trade only exacerbates the problem, and if that's somehow helping Americans, I fail to see it.

Economy slumping...further, I mean

First, let's start with this tidbit.

In late afternoon trading, the S.&P. was 1.6 percent higher and the Dow Jones industrials average up about 130 points, or 1.5 percent. The technology-heavy Nasdaq was 1.1 percent higher.

I use this to illustrate a point. To that end, here's fact one: Most of us do not make our livings or fortunes off of the stock market, although many people's retirement funds are in 401(k)s. There are a privileged few in my income range who have anything to do with it, but by and large people earning the average American wage live of their paycheck and hope to have enough in savings to send the kids to college. Fact two is that economists say consumer spending drives about 2/3 of the GDP. That is why I consider the "real" economy that of the vast majority of us who work jobs and earn paychecks (including those many small business owners who work for a living). My point is that the system is perfectly capable of seeing stocks rise while the economy as a whole falls.

Economists said the drop in economic activity — with the gross domestic product shrinking at a 0.3 percent annual rate — presages more bad news in the months ahead. The impacts of a now-global financial crisis are continuing to squeeze companies and impede investment, causing more layoffs and austerity, while prompting Congress to consider a fresh round of spending aimed at stimulating commerce.

“The economy has taken a turn for the worse, big time,” said Allen Sinai, chief global economist for Decision Economics, a consulting and forecasting group. “Consumption literally caved in. It is a prelude to much worse news on the economy over the next couple of quarters. The fundamentals around the consumer are all negative, and there are no signs of any help anytime soon, from anywhere.”

Of course stocks will eventually fall, but the easy lesson to learn is that if you're at the top, it's easy to say "The fundamentals of the economy are strong". And despite the fact that individuals have been suffering as their paychecks grew smaller and smaller over the past several decades, even just a few months ago President Bush was telling us everything would be fine. But that's not true.

Now that the credit bubble has popped, we are in for a giant sag. We may not be in the second Great Depression, but we are not going to return to pre-Crisis levels of consumer credit. This is a good thing in the long run, but a bad thing in the short run while we watch our businesses gasping for breath as the economy runs out of enough air to support them all.

I don't know how much clearer I could possibly need to make it, but the point is that the foundation of our strength is the average, wage-earning citizen. First and foremost we must make sure that they are secure. Wages must be strong, and things like the housing bubble must be prevented. I hope the Obama presidency will take a stronger stance on shoring up the individual over big business.

Stimulus Not Enough

While Republicans and their useful fools in the media elite are busy complaining about "pork" that might possibly arise to single-digit percentage points of the total stimulus package, economists are worried that the stimulus package isn't doing enough to boost the economy. Paul Krugman:

To see how bad the numbers are, consider this: The administration’s budget proposals, released less than two weeks ago, assumed an average unemployment rate of 8.1 percent for the whole of this year. In reality, unemployment hit that level in February — and it’s rising fast.

Employment has already fallen more in this recession than in the 1981-82 slump, considered the worst since the Great Depression. As a result, Mr. Obama’s promise that his plan will create or save 3.5 million jobs by the end of 2010 looks underwhelming, to say the least. It’s a credible promise — his economists used solidly mainstream estimates of the impacts of tax and spending policies. But 3.5 million jobs almost two years from now isn’t enough in the face of an economy that has already lost 4.4 million jobs, and is losing 600,000 more each month.

There are now three big questions about economic policy. First, does the administration realize that it isn’t doing enough? Second, is it prepared to do more? Third, will Congress go along with stronger policies?

Krugman said the stimulus package wasn't enough when it was first proposed, and he's hardly changed his view now, with the economy worsening at a faster clip than predicted and job losses so vast that it appears an economic restructuring is taking place. But he's not alone. Here are a few other opinions from this Washington Post article:

Analysts increasingly view the administration's actions so far as insufficient given the scope of the problem. The stimulus package was designed to "save or create" 3.5 million jobs, according to the administration. But the nation has already lost 4.4 million jobs since the start of the recession. Many banks and other financial institutions, whose health is critical to the economy, are teetering, and the Treasury Department has yet to finalize the details of its plans to remove from their balance sheets the toxic assets dragging them down.

"It's premature to say we need another stimulus, but the economy is performing much worse than when [the law] was signed, and the odds are increasing that we'll need a bigger policy response," said Mark Zandi of Moody's Economy.com, who has advised Democratic lawmakers. "What we've learned is policy has been a step behind this whole downturn. It's important to get a step ahead."

The International Monetary Fund yesterday urged governments worldwide to consider additional fiscal stimulus, noting that the public sector must help prevent a collapse of confidence.

[...]

Regulators...are conducting "stress tests" of major banks so that the Treasury Department can better determine what kind of financial support they might need. Those tests assume that, in a particularly bleak scenario, the unemployment rate will average 8.9 percent this year and 10.3 percent next year. But if the government projections on unemployment turn out to be too rosy, officials could underestimate the trouble banks are in. A higher unemployment rate means greater losses for banks because more people default on their loans.

The worsening employment picture, meanwhile, could also create a hole too big for the stimulus package to fill.

As a result, government needs to step up and do more, said Heather Boushey, senior economist with the liberal Center for American Progress.

"It's not going to be enough, folks. I hate to break it to you," she said.

To be fair, not all economists believe that the stimulus package will actually achieve its intended purpose. And others are concerned about the massive debt we are incurring in our efforts to shore up the economy. No doubt I've lambasted the Bush administration on their complete lack of fiscal discipline (or more accurately, the politicization of budgetary policy) but it's hard to argue against even more bold action when we appear not to have even hit bottom yet.

Can Democrats bring the noise on the economy?

This article discusses the state of the economy from the point of view of attacking it as a weak point of the Republican platform. In all honesty, it's tanking from the viewpoint of the common person, despite the fact that it's still growing at a nice clip and making the rich that much richer. Can the Democrats use that effectively? I'm not sure, and I invite someone else to take that question up (Adam, that's your cue). My issue is with the economy itself and how to fix it. The author brings up some ideas that he disagrees with and some he agrees with.

After months without a domestic agenda to capitalize on Bush administration unpopularity, Democrats are moving -- haltingly, disjointedly, belatedly -- toward embracing the mother of all electoral issues: the failure of robust top-line growth in the U.S. economy to filter into the wallets of Americans below the top of the pyramid.

[...]No amount of chaff can hide the failure of our remarkable productivity surge (and the accompanying robust growth of the overall economy) to meaningfully boost average wages, which have barely grown with inflation. Separated by income level, the picture is more dismal. From 2000 to 2005, for example, average weekly wages for the bottom 10% dropped by 2.7% (after adjustment for inflation), while those of the top 10% rose by 5.3%.

That's bad news whatever way you cut it. Bush has explicitly stated that tax cuts would help the American economy, including all income spectrums. While he could theoretically attach reduced taxes to the growing economy, they cannot simultaneously explain lower earnings for the lowest class and higher earnings for the highest class. Besides which, that argument is completely blown out of the water by the Clinton era, which had higher taxes and higher growth. I'm not saying that taxes were responsible for that either, since the same trend in income inequality has been evident for decades.

To be sure, income inequality is not a new challenge. Over the past 25 years, the average hourly wages of high school dropouts fell by nearly 20% (after adjustment for inflation) while those of holders of advanced degrees rose by nearly 30%, according to the Economic Policy Institute.

The point is that taxes in and of themselves neither retard growth nor encourage it, except in tangential ways. The only connection I would argue exists would be that of the federal deficit and debt. Most people aren't aware that a federal budget deficit is accompanied by borrowing. A lot of that borrowed money comes from China and other nations we are only somewhat friendly with. That money that we borrow from them becomes part of the federal debt. As the debt grows, more and more tax money is spent on paying off that debt (because the US, unlike you or me, cannot default on a loan and get away with it). That money is not available for necessary programs, such as job training, scholarships, or grants. For some tax stats that I talked about before, look here.

What Democrats now need to do is to reconcile an armada of alternatives. More extreme factions argue that the centrism of the Clinton administration doesn't adequately address 21st-century fears and offer in its place statist visions of organizing economic policy around belittling American capitalism and fiscal responsibility, while trumpeting unionization and protectionism.

[...]But giving in to politically expedient demands, such as barricading our borders, would be a mistake. Trade agreements have brought American consumers better, cheaper goods and allowed the economy to grow quickly without inflation.

If it were true that free trade brings cheap goods in an absolute sense (that is, minus whatever tangential cost to the economy), then it would be a good thing. Also, the growth of the economy should always be a good thing, but obviously it's not when it's not attached to growth in jobs or wages. The idea that cheaper goods is an absolute good despite the shrinking of wages is discussed extensively in this discourse on Slate between economist Jason Furman and author Barbara Ehrenreich (famous for her study of low-wage workers in the book Nickel and Dimed). I think I can confidently state that the idea that low pay is acceptable for cheap goods is quashed by her study. Depressed wages are bad no matter how cheap the goods we get. Of course, the converse would have to be true to favor any kind of protectionism. That is, we would have to find out that more expensive goods actually cause higher wages. I'm not sure that's true either. I haven't done an extensive study of the benefits or costs of protectionism.

Moreover, two grating issues -- immigration and gas prices -- have strong links to the widening wage gap. At the least, immigration certainly puts further pressure on wages of lower-income workers whose jobs the new arrivals compete for. And the storm over gas prices -- which on an inflation-adjusted basis are still not higher than they were in the early 1980s -- has been exacerbated by the thin wallets of workers facing them at the pump.

As far as immigration, we don't have hard and fast numbers on the effects of illegal immigrants on wages. However, Eric Schlosser's book Reefer Madness has been very enlightening on the subject of illegal immigrant labor. For one thing, migrant labor is nothing new to the US. Historically, migrant Mexicans have always provided the muscle in our farming industry. The Dust Bowl era was the only time when significant numbers of Americans took to the roads looking for work on farms. In other words, whatever phenomenon can be ascribed to illegal immigrants, the simple fact of migrant labor is not new. What may be new though, is the incredibly low wages they earn because, ironically, we made them illegal. Legal immigrants who are unskilled laborers may compete for the jobs available to citizens on the American job market, but we tend to require people to have skills of some sort in order to immigrate.

Gas prices though, are definitely a problem. As he notes, adjusted for inflation gas still isn't costing as much as it was in the early 80's, but in real terms, wages have fallen since the 80's, so I wonder if put together it would turn out that gas has increased as a percentage of disposable income. You know what we need to do about that though; no embargoes or Arctic drilling, but divorcing ourselves from oil. That's definitely something the Dems should be talking about everywhere they get the chance.

A suggestion Rattner makes that I fully agree with is to boost the skills of the American worker.

Nor is waxing nostalgic about the Clinton years enough; we need to recognize that there's no easy way out and belly up to the real work, like improving education and training. That may sound like motherhood-and-apple pie talk but it is, in fact, one kind of supply-side economics that actually works.

While the drumbeat of offshoring remains undeniable, almost any CEO can confirm that U.S. companies are clamoring for skilled workers -- and are willing to pay up for them. At the same time, shrinking the pool of unskilled Americans will add upward pressure to the wages of those remaining.

Here's the thing a lot of people don't understand: even if we used protectionism of one form or another for American workers, we're not going to get those jobs back in the manufacturing sector. I believe that US companies should have to pay foreign workers the equivalent of the US minimum wage, but in real dollars that's still a huge savings. It might force them to raise wages from 25c an hour to $1, but that's still a long way from the $5.15 required for an American worker. Let's just face it, we're not getting those high-wage, low-skill manual labor jobs back. And because of that, we need to provide training and education for American workers, not just for their benefit, but for the benefit of the US business community. We have to have people who can do the job, and if we don't, we will lose on the international scene. I think education, from K to post-graduate, should be a huge part of the Democratic platform.

Of course, any sensible Democratic agenda must also include getting a grip on runaway federal spending, budget deficits and unfunded entitlement programs, all of which would be aided by rolling back President Bush's outlandish tax cuts. We shouldn't try to redistribute our way out of the widening gap, but federal tax policy should not add to the problem.

As he says, of course we have to have taxes. Taxes are good when spent wisely. If people don't trust the government with their tax money, I can understand that. All too often you get things like the Alaskan bridge to nowhere. Whoever is in power, they should spend every dollar as if it were coming out of their pocket. A lot of people forget that neither Republicans nor Democrats have provided the sort of accountability that would make people really trust the federal government. We need to reverse that.

Let's ring in a new era this time, and quit just mouthing the words about responsibility and doing the right thing. Let's just do it.

Where will the economy go?

According to Fed Chairman Ben Bernanke, it won't go into recession. At least not any time soon. I certainly don't think I can make any predictions with as much certainty as him. Still, that seems like a very optimistic take on the state of the economy. With people in more debt than ever, wages losing to inflation, and the slow stall of the housing market, one wonders what hidden knowledge this report is predicated on. We've also seen a big wave of bankruptcies caused by credit over-extension in the sub-prime lending market as well. Bernanke's not so worried about the effects of this collapse:

On another topic, Bernanke said the growing troubles in the market for risky mortgages thus far doesn't appear to be spreading to the overall economy. "At this juncture ... the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained," he said.

"Although the turmoil in the subprime mortgage market has created financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear," Bernanke said.

But as the article I linked earlier makes clear, the housing market is in a stall. Previously this had been one of the administration's main claims that the overall economy was doing well. Despite every other sector's performance, the housing market was booming. That's over. Here's the main reason Bernanke feels optimistic:

On the other hand, consumers, who proved "quite resilient" despite the housing slump and increases in energy prices, could continue to keep spending at a pace that would make the economy grow faster than currently expected, he said. And, there are other forces, including a still-good jobs market that is producing fatter paychecks, that could push up inflation.

But unfortunately, according the Christian Science Monitor, inflation is eating all those wage gains.

In the past two months, average weekly earnings have fallen in real terms (adjusted for inflation). That marks a reversal from last fall when, thanks to a dip in energy prices, real incomes were enjoying sturdy gains.

Consumers are being buffeted from several directions. The resurgence of inflation comes even as homeowners face a dip in property values and as the stock market has sagged from a recent peak. All this dragged consumer confidence down a notch in an index released Friday by the University of Michigan.

Bernanke may know things about the market that the rest of us don't. Or he may just be putting on a brave face to keep investors from panicking. But right now, to a lot of experienced economists, it looks like we're going to hit a rough patch sometime soon. Pay off those credit cards while you can.

The story on unemployment

Adam and I were talking about this yesterday, about how real unemployement isn't being reported in most news outlets. The most-quoted figure I've seen is the 9.5% seasonally adjusted U-3, and when a number is that qualified you know it's not quite natural. I just looked up the U-6 measure (the most inclusive measurement) in the current statistics. The percentage of all employable people not working full-time jobs is 16.8%. The U-6 includes part-timers who are looking for full-time work as part of the figure, which is reasonable because a lot of them are part-time because of the economy. The number being reported in the news is the 9.7% U-3, which as you can see is a much more limited measurement.

Now, one thing to note is that the difference between June '08 and June '09 using these two indices tell two different stories. From June '08 to June '09, the U-3 went from 5.7% to 9.7%, a 4% change. The U-6 changed from 10.3% to 16.8%, a change of 6.5%. So the net change in employment is also worse than is being reported. Some of this is people being shunted into part-time jobs, but the U-1 is a measure of how many people have been unemployed more than 15 weeks or longer, and that has risen from 1.8% to 4.8%. Jobs have really just vanished.

The question is, even when the economy starts growing again, how many full-time jobs are going to come back for people? Even when the economy was supposedly so great back in the Bush years (coming off the Clinton high, that is), people were struggling. Just read Nickel and Dimed by Barbara Ehrenreich. Actually I think I've blogged on that subject plenty of times. We keep hearing about how the recession is supposed to end this year or that we may already be at the tail and the economy is starting to recover; we hear that jobs lag behind the economy in general. Either of these things may be true; neither of them means that Americans will be getting well-paid full-time jobs with benefits. Is there any way to change that?

I don't know the answer to that, but it lies in what industries are going to make the biggest turnaround. I honestly don't think that even if the automakers come around and turn profitable, they'll end up re-hiring a lot of people. They're cutting back as much as possible and if their salvation lies in competing with the foreign auto makers, they're going to be making more of fewer kinds of vehicles, which means less workers. America needs growth industries that we can take the lead in. We need to invest in an infrastructure to produce new kinds of goods and services that other countries can't compete with. Things like clean energy, health care and medicine, or eco-science, that the world needs but which can also be profitable industries. It's time to do something new.

Update: Xanthippas just let me know about this article, pointing out estimates of the real number of unemployed, which is well above even the U-6. Read the article for an explanation of how these numbers are arrived at:

By adding these folks back in, William's SGS-Alternate Unemployment Measure rose to a jaw-dropping 20.6%. Separately, the Center for Labor Market Studies in Boston puts U.S. unemployment at 18.2%. Any way you cut the numbers, the situation is very bad. According to David Rosenberg, one-in-three among the unemployed have been looking for a job for more than six months and still can't find one.

That's about 1 in 5 employable people either unemployed or underemployed. This recession is far from over.

We Are So Screwed

Apparently, our recently discovered national thriftiness is dooming our economy (via Megan McArdle):

Consumers are pulling back because they've realized that they're too far in debt. The economy is shrinking in large part because consumers are pulling back. And the result, almost surely, is to leave household balance sheets worse than ever. I can't do this accurately until the Federal Reserve's flow of funds data have been updated, but almost without question the ratio of household debt to personal income has been rising, not falling, as consumers try to save more.

So to escape the debt trap we're in, we must spend more. This is cruel irony indeed, but the lesson really is that we ought to have been a little more thrifty when our economy could afford it as opposed to now, when our economy is diving off a cliff. Our economy has survived on a combination of debt and consumerism, and we shall now pay heavily for our short-sightedness.

Recession? What recession?

Seriously, economists are telling us that the odds are still growing for a recession to occur. I just wonder what makes them think it won't? I know, I know, things could happen, but seriously, do they expect anything the Bush administration is planning to do to make any difference? Without that, what kind of economic events could occur that would line the pockets of the average American with money enough to get the whole economy started again?

The odds have grown that the economy will slip into a recession. At the beginning of last year, many economists put that chance at less than 1-in-3; now an increasing number says it has climbed to around 50-50. Goldman Sachs, the biggest investment bank on Wall Street even thinks a recession is inevitable this year.

Hopeful it can be avoided, President Bush and the Democrat-controlled Congress are exploring economic rescue measures, including possible tax rebates. Federal Reserve Chairman Ben Bernanke pledged to lower interest rates as needed.

The idea is to induce people to boost spending, especially on big-ticket items such as homes and cars, and revitalize economic activity.

With what money? What's the average tax rebate, $1000? What is that going to accomplish, when as we've discussed extensively in previous posts, to all appearances, credit has run out for a substantial number of people? Sure, you can go out and put $1000 down on a car, but without cash every month to back it up there's no point. We may see a spurt of spending at the beginning of the year, but it won't be substantial enough to turn the numbers around for the retailers that had such a bad showing during the holidays. I mean, that's even if I believed in that kind of trickle-down economics, which I don't. And even if it did work, it's not going to cause wages to rise any higher vs. inflation than they have been for the past couple of decades.

Look, incentive packages aimed at reviving the retail economy may help the retail economy. But that's not what's killing most Americans. Why could people not afford those variable rate mortgages in the first place? LACK OF REAL MONEY! People aren't making enough money any more to keep the kind of economy going that we consider the norm nowadays.

Anyway, here's my prediction: recession. And if it's not what the economists officially call a recession, that's only because they look at overall economic growth, which is mainly indicated by business profits. Looking at real wages, real people have been in a recession for over two decades. It's going to take more than tax rebates to fix that.

Housing market slumps, Foreclosures higher

Apropos of my very recent post on the state of the economy, here we have some fresh reports on the state of the housing market and the continuing effects of the massively irresponsible extensions of credit by lenders.

From a report on CNNMoney.com:

Sales of new homes sank to the slowest pace in more than six years in February, with the government's latest reading on the battered real estate market showing the glut of homes on the market reached a 16-year high.

New homes sold at an annual pace of 848,000 in February, according to a Census Bureau report, down about 4 percent from the 882,000 rate in January, which itself was revised lower. The pace of sales tumbled 18.3 percent from February 2006, with all four regions of the country showing sharp declines.

This is surely tied to the fact that so many of the home sales in the past few years have been due to people buying entirely on credit, as lenders gleefully waved wads of cash around telling borrowers the piper never comes to this town. As wages have stalled and even shrunk due to inflation and as the micro-economy for the majority of American has tightened, the time came to pay the piper but they didn't have the money. He's playing his tune and taking all their houses away:

More than 2 million homeowners could lose their houses in the subprime mortgage meltdown, reports CBS News correspondent Anthony Mason. About 300,000 are already in foreclosure and more than 50 lenders are in serious trouble or have gone belly up.

Yes, blame the people for borrowing money they couldn't pay back and taking on house payments they couldn't really afford, but how easy is it to say no the deals they were offering?

Risky lending practices became so lax that in the past two years 40 percent of first-time home buyers put no money down. Now delinquency rates are soaring, adds Mason.

Evidently a lot of people don't find it so easy. Unfortunately, this is the kind of mistake you pay for in a big way. Not only that, but it's the responsibility of these lenders not to extend so much credit to so many people who are virtually guaranteed to default. What to do now? Well, it happens to be in the interest of the United States economy to keep people in their houses and paying on their mortgages instead of letting them declare bankruptcy and leaving millions of empty homes on the market that people won't be able to buy. Hopefully some kind of relief legislation will be passed, because as bad as this already is, we don't want it to get worse and start reaching into the rest of the economy. Two million homes means at least two million homebuyers. That's not the kind of loss our economy, titanic as it is, can absorb with no harm.

Economic growth not equal to prosperity

In many of my previous posts on the subject of the economy, I've mentioned the possibility of economic expansion for the US not bringing wealth into the hands of the masses, but into the hands of a wealthy minority. I found an interesting article in The New Republic that discusses this phenomenon in greater detail. What's really interesting is that previously, it was taken for granted by economists from the right and the moderate Dems that overall economic growth automatically brought higher wages for workers across the board.

Today, however, the Rubinites have been thrown into doubt. It is not that their policies have failed. (They have been abandoned: Clinton's economic policies meant fiscal responsibility combined with downward redistribution, while Bush has embraced fiscal irresponsibility and upward redistribution.) Rather, what has been shaken is something even deeper: their faith in the possibilities of economic growth.

The cause of their doubt is the disturbing performance of the U.S. economy over the last five years. What's happening is very simple: The economy is growing smartly, but, essentially, all the gains are going to the rich. It is almost a dystopian Marxist vision come to life. Corporate profits have soared, incomes at the very top have shot through the stratosphere, and, yet, the vast majority of Americans have not seen their living standards rise at all. This development does not offer much of an intellectual challenge to either the right (which is not particularly troubled) or the left (which is not particularly surprised). But the center is both troubled and surprised. And, for the Rubinites, figuring out just why this is happening, and what to do about it, has begun to unravel their confidence in the moderate remedies that not long ago seemed unassailable.

If you read any news or magazine article or book that talks about the state of the US economy from the last decade, it surely will mention that since the early 70s, income inequality has been rising and the real wages of American workers have fallen, whether the economy did well or poorly, and that wealth has increasingly become concentrated in the hands of the extremely wealthy. The dilemma for Democrats, which Jonathan Chait doesn't explicitly state in this article, is that if their beliefs in moderate, market-based solutions to income inequality don't work, they have to embrace the more liberal economic ideas of their further left comrades (like the guys at the Economic Policy Institute). The political problems with that are apparent, and I'm sure as soon as a whiff of liberal economics is detected in the air in Congress, cries of "Marxism!" are soon to follow. That doesn't mean, of course, that liberal economic policies aren't the right way to go. The problem is getting people to understand that conventional wisdom is wrong and that we need to approach the problem differently.

Economists, especially those on the center left, have lately been paying renewed attention to explanations for rising inequality that center around the lack of bargaining power for labor. First, the purchasing power of the minimum wage has withered away, reducing wages for workers at or near the bottom. In the late '70s, when inequality first began to explode, a minimum-wage worker made well over one-third as much per hour as the average worker. That figure has crept slowly lower and is currently less than 25 percent. Second, labor unions have shriveled. Less than 8 percent of the private-sector workforce belongs to a union, down from more than 20 percent three decades ago. And, third, globalization has thrown much of the workforce into competition with low-paid overseas labor.

These last two factors represent terra nueva for the Rubinites. Until recently, the ideological fissure between the economic left and the center left has always been over the question of at what point the government should step in to redress inequality. Moderates--that is, policy types associated with the Clinton administration, the Brookings Institution, or most university economics departments--believe that the market is generally the most efficient mechanism for distributing wealth. Government should redress inequality, but it should usually do so only after the fact--let the market work, then tax the rich and use some of the proceeds to help the poor. Moderate liberals have historically been restrained in their enthusiasm for the minimum wage and unions, and they have been downright hostile to any limits on international trade.

Economists from the liberal wing of the Democratic Party (those associated with labor unions, say, or groups like the Economic Policy Institute) have always attacked the moderates' prescriptions as naïve. If the rich control a growing share of the national income, they will turn their financial power into political power to protect their holdings. Untrammeled economic inequality will inevitably lock itself into place as the rich buy political influence and propagate policies that safeguard their wealth. And so, the liberals have always argued, government must foster greater levels of equality before the fact, not merely after.

I think that's a fair assessment. The entire history of humans since the market arose has been one of those with greater wealth seeking to lock themselves in positions of greater power and wealth. If the free market worked, it would have worked 500 years ago and peasants wouldn't have been dirt poor in all parts of the world where there were stratified societies, whose existence alone defies the logic of market imperatives. Not that aspects of the free market don't work. After all, I can go to the store and choose whichever brand of laundry detergent I choose, and I can pay either $3.48 or $5.99 (actual prices I saw at the store today).

We have never had a truly free market, and thus proponents can argue that if we did, everything would be fine and dandy. Of course, most of the time, proponents of the free market assume we do already have one, and that everything is fine and dandy. That's patently false, but here we are still talking about it. The plain and simple truth is that the majority of Americans are in more debt than ever, make less than ever, and have less of an ability to better their own situation than ever before. It's time to do something about it, and even though it seems no one can give a clear answer as to why it has happened, we can't sit around pretending it hasn't.

The Economy is so confusing

From Business Week Online:

No, it's not just you—the U.S. economy really is bewildering. The government says gross domestic product expanded at an annual rate of nearly 4% in the third quarter, the fastest pace in a year and a half. The stock market is still up by 4% for this year, despite a sharp 3% drop on Nov. 7. On the other hand, growth in consumer borrowing slowed unexpectedly in September. Some economists argue that the U.S. is teetering on the brink of a recession, if it isn't in one already.

Well, you do have to consider that American's real incomes are down. This is from a slightly older article from the Christian Science Monitor, but it's still applicable:

Income fell 8 percent, adjusted for inflation, for those under 35 and 9 percent for those aged 35 to 44. The numbers add new weight to longstanding concerns about whether younger generations of Americans will achieve living standards that are better - or at least equal to - those of their parents.

Although this is quite old now, this blog post on The Big Picture from 2004 still manages to give some idea about why the economy overall can be booming yet doing nothing for for the average American.

The bulk of the tax cuts were for the investor class (ie, the top 10%); As you can see, it had the expected response - it stimulated investment in the market. To stimulate the economy, you cut taxes for the spending classes - the middle class. They typically spend most of their discretionary income. That in turn stimulates manufactured goods and service consumption, which should lead to additional hiring. The trade off is less of a fund flow driven rally, and more of a better set of employment numbers.

All told, I don't believe that's the most effective way to spend a trillion dollars. As the President often says, "if you want more of something, tax it less." So, on top of middle class tax cuts, if you want to increase hiring, give companies a tax credit for new hires or health care costs or just cut the payroll tax. It's really not that complicated - when you increase your domestic headcount over a previous percentage - i.e., 2001's high number, the firm gets a tax credit. Note that overseas outsourcing or reducing US headcount will not qualify you for the cuts."

He also talks about underemployment which really hurts a lot of people. And people who like to point out how well the economy is doing simply like to point out how many people are employed rather than how muchthe employed people are making.

Anyway, there's little in the way of analysis I can offer, but if it's not clear, the point is that for individuals, the picture still isn't that great whereas most businesses are still seeing decent prosperity.

Why business is pro-immigration

The writer has laid out several arguments for why keeping people from immigrating legally is to our detriment.

WAGE WORRY. In such a world, an open immigration policy produces massive gains to trade, as people move to countries that can make the best use of their skills and pay them accordingly. It's unambiguously good for the overall global economy if an entrepreneurial Mexican or Chinese can move to the U.S. and start a new business. Similarly, it's good that an ambitious and smart young Russian or Indian can move to the U.S., go to business school, and become a hot-shot consultant or an investment banker, either in the U.S. or elsewhere.

Such a world of open borders would mimic, on a larger scale, the situation that already exists within the U.S. People can move long distances from one part of the country to another, chasing better jobs and higher pay. Florida and Arizona do not erect barriers saying, "No more immigrants from the Midwest." Instead, they welcome them and even boast about the number of people moving to their states as a driving force for growth.

I can see that. I suppose though, that there are people who would like to control the movements of others into their cities or neighborhoods. I mean, WASPs generally don't favor low-income housing developments in their areas for all sorts of reasons.

Another objection is that a higher number of immigrants will add to the country's fiscal burden, through higher future medical and education costs. There's more validity to this argument. It costs local governments a lot to educate immigrant children, and future Medicare and Medicaid expenses could effectively bankrupt the government, according to current projections.

But these problems are not as big as they seem. As the children of immigrants grow up, their contributions to the overall economy should exceed the costs of their education, even though that may not help the finances of the towns or cities where they grew up. And the long-term state of Medicare and Medicaid is an issue that is going to have to be dealt with regardless of whether or not there are immigrants here.

Theoretically, all of us are going to be productive enough to the economy to earn back more than was spent on us by our government (paying it back in taxes and such). The point is that this model should work whether people are born and raised in one place, or if they move and are raised in another place. In other words, looked at globally, it doesn't matter who spends money on someone because that someone will put money back into the economy no matter where they are. Of course, that's a very corporatized view of the world. In truth, if a child born in Mexico is educated here but then runs off to work in India, we will certainly have lost the value of his education. Businesses though, assume that enough trade will happen (ergo, a child born in Canada, raised in India, works in Texas) that it really won't hurt the local economy. I'm not absolutely sure about that.

A DRAINING DILEMMA. The biggest genuine obstacles to an open-borders policy are political and cultural, not economic. The first is that an excessively rapid and large influx of entrants from other countries could overwhelm the existing culture in a country or a region. This is a serious issue and not merely a reflection of cultural bias.

Second, an excessively rapid and large outflow of emigrants from a country -- particularly an outflow of especially well-educated people -- can lead to a brain drain that damages the viability of an existing society. In the extreme, if enough people leave, it could create what Lant Pritchett of the World Bank calls a "ghost country." Nevertheless, the ability to move should be a fundamental right.

I think we definitely must be concerned about turning Mexico (or parts of it) into a "ghost country". I blogged about this a little while back. The dangers of having a country that can't enforce its own border security attached to our border for more than 1,000 miles needn't be stated more than once. Mexico must remain a viable country for our safety.

You might ask why I'm rehashing this point. Basically, I think business is going to get its way one way or the other. Of course if enough people stand up and say no to immigration, well, they'll lose, but they may intimidate their lawmakers into not totally giving in to the business world's ideas on the matter. I don't know what, but we will see a compromise on this issue, and those people who are holding out for building a great wall on the border need to prepare to be disappointed.

Rove says the economy is doing well; most people don't think so

That's a very simple way of putting it, but according to this article from Bloomberg.com, Bush's economic efforts have gone largely unnoticed, mostly because they haven't done anything for those of us who need it.

Political experts say it may be a tough sell: Voters don't feel optimistic, polls show, and growth rates are expected to slow as the housing market cools and gasoline prices remain near all-time highs.

[...]Seventy percent of 1,002 respondents in a May 8-11 Gallup poll said the economy was in fair to poor condition, up from 63 percent in an April poll.

Now that's some numbers. But perception isn't always reality. It could be that people feel that way because they're not looking at the big picture.

People either feel it in their day-to-day lives or they don't, and no amount of repetition of abstract numbers to the contrary is going to change their perceptions,'' says Bruce Bartlett, a policy analyst in the Reagan administration and author of a 2006 book critical of Bush.

By most major indicators -- from a historically low 4.7 percent unemployment rate to strong corporate profits to the stock market -- the economy is moving forward. ``We are like marathon runners winning the race,'' Edward Lazear, chairman of the White House Council of Economic Advisers, said in a May 23 interview.

[...]In his AEI speech, Rove, 55, emphasized the creation of 5 million jobs in recent years. He also said Bush's tax cuts have stimulated growth, making up for revenue lost with lower rates. A tax reduction on stock dividends to 15 percent from 40 percent prompted the biggest companies in the Standard & Poor's 500 Index to raise dividend payments on 725 occasions, he said. That money is ``going into retirement funds and individual retirement accounts and people's pocketbooks,'' he said.

And he described ``core inflation,'' which strips out food and energy, as low, citing a U.S. Labor Department report showing a 2.1 percent gain in the 12-month period ended in March.

But if that's the case, then why do people still feel pessimistic about the economy?

Since the last recession ended in November 2001, the U.S. has added a net 4.35 million jobs, or an average of 82,000 a month, according to the Labor Department. That's less than half the 9.57 million jobs, or 181,000 a month on average, created in the same period of time after the previous recession ended in April 1991.

``Almost all the benefits of productivity growth have gone to firms, and very little to workers,'' says Harvard University economist Jeffrey Frankel, a member of the Council of Economic Advisers under President Bill Clinton, whose adviser James Carville used the slogan, ``It's the economy, stupid,'' to stress the importance of the issue in the 1992 election.

One explanation for the public malaise may be the distribution of prosperity. Total compensation for Americans fell to 65.4 percent of national income in 2005, down from 66.2 percent in 2001, Federal Reserve figures show. At the same time, corporate profits rose to 12.3 percent of national income, up from 8.5 percent in the year Bush took office.

Oh, maybe that's why.

``The risk is that Democrats can play on the old `Are you better off than you were?' and a lot of Americans are feeling that they're not,'' says Tim Penny, a former Democratic congressman from Minnesota who backed Bush's plan to overhaul Social Security last year. ``This really is a referendum on Bush's tax cuts in an environment in which voters are feeling pinched economically.''

Bush aide Hubbard says the administration is confident of the outcome of such a referendum. ``We would love to debate whether people are better off today than they were 5 1/2 years ago,'' he says.

Maybe he shouldn't be sounding so confident there. But maybe he's just keeping his game-face on until they've lost, like a true professional.

Obama to cut deficit in half by end of term

After he banned gimmicks used by the Bush administration to make the federal deficit look smaller than it actually was, President Obama plans to outline steps in his budget proposal this coming week to halve that deficit it in four years, primarily through tax increases on the rich and corporations (whereas 95% of Americans are about to get their taxes cut) and cutting spending on the wars in Iraq and Afghanistan:

Even before Congress approved the stimulus package earlier this month, this year's deficit was projected by Congressional budget analysts to approach $1.2 trillion, or 8.3 percent of the overall economy, the highest since World War II. With the stimulus and other expenses, some analysts say the annual gap between federal spending and income could approach $2 trillion when the fiscal year ends in September.

Obama proposes to dramatically reduce those numbers by the end of his first term, cutting the deficit he inherited in half, said administration officials, speaking on condition of anonymity because the budget has yet to be released. His budget plan would keep the deficit hovering near $1 trillion in 2010 and 2011, but shows it dropping to $533 billion in 2013 -- still high in dollar terms, but a more manageable 3 percent of the overall economy.

To get there, Obama proposes to cut spending and raise taxes. The savings would come primarily from "winding down the war" in Iraq, a senior administration official said. The budget assumes that the nation will continue to spend money on "overseas military contingency operations" throughout Obama's presidency, the official said, but that number is significantly lower than the nearly $190 billion the nation budgeted for Iraq and Afghanistan last year.

Obama also seeks to increase tax collections, primarily by making good on his promise to eliminate the temporary tax cuts enacted in 2001 and 2003 for wealthy taxpayers, whom Obama defined during the campaign as those earning more than $250,000 a year. Those tax breaks would be permitted to expire on schedule for the 2011 tax year, when the top tax rate would rise from 35 percent to more than 39 percent.

Obama also proposes to maintain the tax on estates worth more than $3.5 million, instead of letting it expire next year. And he proposes "a fairly aggressive effort on tax enforcement" that would target tax havens and corporate loopholes, among other provisions, the official said.

Overall, tax collections under the plan would rise from about 16 percent of the economy this year to 19 percent in 2013, while federal spending would drop from about 26 percent of the economy, another post-war high, to 22 percent.

That'll deliver on three campaign promises right there... but wait, let's not forget about health care:

The budget also puts in place the building blocks of what administration officials say will be a broad restructuring of the U.S. health system, an effort aimed at covering some of the 46 million Americans who lack insurance while controlling costs and improving quality. Many lawmakers said they had expected a health care overhaul to be pushed off while Obama deals with the economic crisis, but administration officials stressed they intend to forge ahead with comprehensive reform...

Administration officials and outside experts say the most likely path to revamping the health system is to begin with Medicare, the federal program for retirees and people with disabilities, and Medicaid, which serves the poor. Together, the two programs cover about 100 million people at a cost of $561 billion in 2007. Making policy changes in those programs -- such as rewarding physicians who computerize their medical records or paying doctors for results rather than procedures--could improve care while generating long-term savings, expert say. It also could prod private insurers to follow suit.

Obama's budget request would create "running room for health reform," the official said, by reducing spending on some health programs so the administration would have money to devote to initiatives to expand coverage. The biggest target is bonus payments to insurance companies that run managed-care programs under Medicare, known as Medicare Advantage.

The Bush-era program has attracted nearly a quarter of Medicare beneficiaries to private health insurance plans that generally cover a package of services such as doctor visits, prescription drugs and eyeglasses. But the government pays the plans between 13 and 17 percent more than it pays for traditional fee-for-service coverage, according to the Medicare Payment Advisory Commission, which advises Congress on Medicare financing issues. Democrats have long complained about the cost, and eliminating the extra payments would save about $35 billion over the next five years.

Administration officials also are debating whether to permit people as young as 55 to purchase coverage through Medicare. That age group is particularly vulnerable in today's weakened economy, as many have lost jobs or seen insurance premiums rise rapidly. The cost would depend on whether recipients were offered a discount or required to pay the full price of coverage.

As with the stimulus package, this show this is no small-thinking administration.